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What Is PBX?

Simone Johnson
Simone Johnson

Does your business need a PBX system?

  • Private branch exchange (PBX) systems are business-grade, private telephone networks.
  • There are three types of PBX systems: analog, digital and cloud-hosted.
  • Cloud-hosted PBX has become the most popular type in recent years and offers nearly unlimited flexibility.
  • This article is for business owners interested in installing a business phone system that offers employees a wide selection of calling, collaboration, and mobile features and tools.

What is a PBX?

A private branch exchange (PBX) is a business-grade telephone system. These types of systems provide the added functionality businesses need in a telephone solution, such as the ability to offer employee extensions, and they have automated attendants that answer and route calls to the proper people or departments. A PBX uses various communication channels, such as Voice over Internet Protocol (VoIP) and Integrated Services Digital Network (ISDN).

business phone system is different than residential or cell phone services because of its service offerings; such systems offer features like call conferencing, extension dialing, business-hour settings for routing off-hours calls, customer waiting queues, and hold music.

Key TakeawayKey takeaway: PBX stands for private branch exchange and allows businesses to manage multiple calls on a private telephone network.

How does a PBX system work?

A PBX system is monitored using a switchboard, which processes the connections between telephones to facilitate a call. This system allows your business to provide multiple phone lines that are connected to a public switched telephone network or VoIP network, which is how calls are made and received.

A PBX system also controls the numerous features business phone systems have. Besides allowing for communication with outside callers, a PBX system allows your business's phone lines to be connected so employees can easily communicate with each other.

Features of a hosted PBX

PBX features are what differentiates business phone systems from mobile or home phones. Here are some of the more valuable features:

  • Voicemail-to-email: In addition to traditional voicemail service, many PBX systems offer voicemail-to-email, which provides phone system users an audio file or transcript of the message left on their phone.

  • Auto attendant:  An automated attendant gives callers the option of pressing a specific number so their call is directed to the right person or department. For example, the attendant may say, "press one for sales," or "press two for customer support."
  • On-hold music: Rather than customers or clients waiting in silence while they are on hold, PBX systems provide businesses with the option to play hold music. Some systems play preselected music or custom music selected by the business.
  • Paging: If an employee wants to send a message to the entire team, they could use the paging system to record a message using their telephone, which is then broadcast through a system of speakers to all employees or sent to a select group of employee phones.
  • Presence: This feature allows employees to check whether their co-workers are available or on a call. 
  • Call reports: These types of reports break down your company's call data. It includes information on your business's phone usage, which can be further detailed by user or department.

  • Online management: This feature allows you to manage the phone system via an online portal. Administrators use the portal to add users, set phone numbers, review call reports, create ring groups, and see monthly statements. Employees log into the portal to check their voicemail, view the company directory, and create call-forwarding routes.

  • Call forwarding: This lets you have your office phone forward calls to another number when you don't answer.
  • Call recording: This gives users the option to record their calls for playback at a later time.  
  • Call queues:  A call queue helps you manage calls that come in simultaneously by allowing you to place them in a line until someone is available to speak with them.

  • Extension dialing: Callers can plug in an employees' extension to reach their direct line.
  • Ring groups:  This allows businesses to put employees with similar roles into one group, which is helpful when customers are trying to reach someone within a certain department. For example, if you allow callers to press two for sales, the call will be forwarded to the employees in that ring group.

  • Call transferring: This option lets employees transfer calls to their co-workers.


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Because most PBX systems are now automated, they're sometimes known as private automatic branch exchange (PABX) to differentiate them from PBX systems, which required a live operator to make connections in the past. Because that practice has fallen out of use, though, the term "PBX" typically implies that the system is automatic.

Key TakeawayKey takeaway: In the past, a PBX system required a live operator to make connections between PBX users and callers. Today, this is no longer the case as systems are now private automatic branch exchange systems. The PBX system is automatically programmed to make connections.

Analog PBX

Traditional analog PBX systems, often referred to as landline systems, are becoming increasingly rare.  They connect to the public switched telephone network (PSTN) over a plain old telephone service (POTS). This allows the system to join voice and fax calls via copper wiring. If you have an analog PBX system and wish to connect it to digital channels such as VoIP, you will need to use an adapter.

Key TakeawayKey takeaway: An analog PBX system uses the public switched telephone network to help users communicate.

Digital PBX

The most widely used type of business phone system is a digital or IP PBX system, which sends voice and video communications via the internet. You can choose a traditional IP PBX or a premises-based IP PBX, which is a VoIP PBX system that is housed physically in the office and connects phones over your office's local area network, often using the same web network as your office computers.

"VoIP uses the internet to transmit the audio from the caller to the call recipient, which eliminates the need to create a physical network," said Yaniv Masjedi, chief marketing officer at Nextiva. Typically, setup is cheaper, but the quality of your calls depends on your internet speed.

To connect an on-premises PBX system to the PSTN, you need either a Primary Rate Interface (PRI)- or Session Initiation Protocol (SIP)-trunking service. A SIP-trunking service provides additional benefits such as disaster recovery, call accounting and advanced call routing. [Read related article: What Is SIP Trunking? Do You Need It for Your Business?]

An on-premises PBX requires a large capital expenditure on hardware and other equipment as well as continuous maintenance and updating costs. You can expect to spend around $6,500 upfront on the hardware, phone, setup, and licensing fees, plus monthly service costs.  

IP PBX systems can be a more budget-friendly option by cutting down on your equipment costs. They provide high-definition audio, call queuing, and business-hour rules, and they can integrate with other applications like a CRM.

Key TakeawayKey takeaway: A digital PBX is usually referred to as a VoIP phone system. It uses the internet to connect users and callers, and offers helpful features like call queuing, and quality audio at a low price.

What is a cloud PBX?

A cloud PBX system, also known as hosted or virtual PBX, is an IP-based telephony system provided by and accessed completely through the internet. A hosted system provides all PBX features, applications, and services, and it maintains software in the cloud rather than on a server like digital systems. 

Key TakeawayKey takeaway: A cloud PBX is a phone system that is supported by the internet; its software isn't stored on a server inside your office, but in the cloud. It offers a number of valuable tools and features, including automated attendants, video conferencing and softphones.

Benefits of a hosted PBX system

With cloud PBX, your phone system, applications, features, and phone service are all billed together, with automatic maintenance and software updates. Cloud PBX systems are significantly more flexible than traditional phone systems, offering advanced disaster recovery – i.e., more flexibility and resilience than a traditional phone system in the event of a disaster, like a network failure or a hurricane – and geographic flexibility that allows employees to make calls from anywhere, anytime. This allows for easy remote work for anyone in your company.

Cloud-hosted PBX systems also tend to be more budget-friendly than on-premises PBX systems because, like digital PBX systems, they do not require equipment or ongoing updates and maintenance. You can expect to spend around $2,000 in a one-time phone cost for a cloud PBX system.

Cloud PBX systems are easily scalable and generally support an unlimited number of users. Adding users is instantaneous. Setup and maintenance are typically fast and require no downtime.

Key TakeawayKey takeaway: Getting a business phone number is a simple process with hosted PBX systems, as there are a wide variety of highly-rated business phone system providers. Learn more about some of the top options in our 8x8 review, Dialpad review and Ooma review.

Cons of a hosted PBX system

Hosted PBX systems require some equipment to get up and running if you do not already own the necessary components. For example, you will need to purchase IP phones, which generally require an Ethernet port and a large router.

Because hosted PBX systems are web-based, you must have a strong internet connection for communication to run smoothly. If your internet service provider is unreliable, you will likely have a frustrating experience. Make sure your ISP is strong and reliable and can support your communication needs before committing to a PBX.

You should also take measures to ensure your PBX system is secure. Because it's hosted on the internet, your PBX system could be more susceptible to security breaches than a server-based system. Take the time to ask hosted PBX providers about their security measures and how they protect the system. You should make sure they have both physical and network security, SIP endpoint security, toll fraud monitoring and detection, and a dedicated monitoring system that alerts you to any suspicious activity.

Key TakeawayKey takeaway: If you have a hosted PBX system make sure your internet connection is stable so communication is crisp and clear. Cloud-hosted systems are also vulnerable to security breaches if the right precautions aren't put in place.

What questions should you ask before purchasing a hosted PBX system?

Hosted PBX systems are the latest entrant in the telephony market and boast several appealing features for small businesses. However, a cloud PBX may not be right for you.

Here are some questions to ask yourself before committing to hosted PBX:

  • What equipment do I already have (e.g., phones, servers, Ethernet ports, or cords)?
  • What equipment will I need to purchase?
  • How much do I currently pay for my telephone services?
  • Can I save money by switching to hosted PBX? How much?
  • How strong is my ISP? Can it support a hosted PBX system?
  • What features do I need? What features do I not need?

Here are questions to ask the provider:

  • What kind of support do you offer (e.g., 24/7, web chat or phone, setup support)?
  • Can I keep my current phone number?
  • What are the startup costs?
  • Are there any additional monthly costs?
  • If I have legacy telephone equipment, can that be integrated? How?

Key TakeawayKey takeaway: Before purchasing a hosted PBX system, consider the needs of your business, the total cost,  and which features are offered.

Additional reporting by Kiely Kuligowski.

Image Credit: CopterAnansak / Getty Images
Simone Johnson
Simone Johnson
Business News Daily Staff
Simone Johnson is a and Business News Daily writer who has covered a range of financial topics for small businesses, including on how to obtain critical startup funding and best practices for processing payroll. Simone has researched and analyzed many products designed to help small businesses properly manage their finances, including accounting software and small business loans. In addition to her financial writing for and Business News Daily, Simone has written previously on personal finance topics for HerMoney Media.